Buzz on the Street: Welcome to the Party, Janet Yellen
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, October 7, 2013
Credit Check and Options Flows
Good morning Minyans -- Déjà vu all over again in credit derivatives, with US CDS taking another leg wider to 45.5bps, while everything else -- 2 yr. swaps, CDS of large US financials, and broad index HY CDS -- are basically flat. At current levels, US CDS have the potential to start sending jitters through the rest of the complex and pressure stocks even more, so paying attention right now is probably even more important, especially if your time frame is on the shortish end.
Early last week, I highlighted a large option trade in Gulfport Energy (NASDAQ:GPOR) that looked like it had a bullish slant. On Friday, the same contracts were in play again in similar size. Whether it was the same trader or not, the bets that GPOR will be comfortably in the 70's are growing rather large.
Also in energy, Thursday I Tweeted about a large ratio spread in refiner Tesoro (NYSE:TSO), where a trader sold 8000 Feb $50 calls and bought 34,000 Feb $60 calls to open. This position requires the stock to move up sharply and soon in order to pay off. I'm pointing it out because it jives well with the Morgan Stanley's take regarding the Transcanada pipeline that I Buzzed about on Wednesday.
Lastly, the Carlyle Group (NYSE:CG) also saw a large bullish call trade on Friday as more than 5,500 Nov 30 calls were bought to open between $0.35-0.50. The chart also hinted at the breakout off of a multi-month downtrendline, but here is the catch: it looks like Friday's spike might have been caused by the calls trade, as market makers had to buy about 125,000 shares to hedge themselves (out of total volume of 635,000 shares). It's a chicken and egg kinda thing but worth noting if you are inclined to follow along.
Interest Rate Market Is Taking Things Seriously
The Treasury market is starting to really take this seriously, which is why I'm not surprised that credit is wider and equity is down this morning. Term repos (as in loans longer than overnight) are now drying up and repo rates are skyrocketing, relatively speaking. This is due to dealers offering less inventory after having liquidated their entire T-bill holdings two weeks ago. All of it makes sense though, there is a move to cash away from collateral and assets, especially dollar assets.
T-bills that expire over the next 3 weeks are still reflecting this unease, trading at discount rates of 14+ bps. So at this point, any sort of resolution is going to get a relief rally. As much as I don't think the equity market is justified at these levels by actual economic activity, this sell-off has been more about being cautious around the debt ceiling and government shutdown. If we do see any further declines in economic activity, it is going to be because of a loss of confidence that leads to reductions in capital investment rather than less fiscal spending.
The USDJPY is flirting with its upward sloping trendline and is right here, right now at the 200dma. Eyeball credit goes to Duncan Parker. In addition, DXY has multi-year support between 78.25 and 79 - currently sitting at 80.
Equity breadth is more than 4:1 negative after the first 30 minutes.
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Secondary Battle in Place
Since our earlier discussion, natural gas has hurdled its nearest-term resistance line.
Now we have to see if it can sustain the gains, and continue higher to test the Oct 1 high at 3.653.
Natural gas is climbing this morning towards a test of its Sep-Oct resistance line, now at 3.595, which if hurdled and sustained, should trigger upside continuation towards a test of more important resistance at the Oct 1 recovery high at 3.653.
Conversely, a failure to hurdle the resistance line followed by a decline that violates last week's low at 3.482 will point United States Natural Gas (NYSEARCA:UNG) lower, towards a test of more important support at the 9/26 low of 3.402.
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Tuesday, October 8, 2013
Tapes that are weak all day (with 2:1 negative breadth or worse) tend to end that way.
Absent a sudden resolution on the Beltway that clears the debt ceiling from the wall of worry, the tape will continue to have an overhang.
This is the "other side" of performance anxiety and why we often say, when discussing this dynamic, that the buyers are higher and the sellers are lower.
Should the partisan bickering continue through the week, my sense is we trade to or through S&P 500 (INDEXSP:.INX) 1600.
My Snake Eyes -- December SPDR S&P 500 ETF Trust (NYSEARCA:SPY) puts -- were always right-sized by nonetheless underwater. That said, if and as we continue to slip -- and the delta upticks -- I'll begin to peel out of that found money.
I said it last week and I'll say it again; while a default is a low probability event, this stand-off sums up the state of social mood and would be an apropos pin prick to government.com.
Not that I wish to see it; trust me, if the US defaults, there will be no winners. None.
Alas, that likely won't happen; we just have to navigate the landscape from here to there. And we have to maintain perspective and (dare I say) enjoy the journey. Easier said than done, but not impossible.
Fare ye well into the bell and remember, the definition of an investment should never be a trade gone awry.
Momentum Move Failure: AMZN
Amazon.com's (NASDAQ:AMZN) action today is a good example of the idea that when momentum moves fail, they fail with a bang, not a whimper.
AMZN showed a constructive 1-2-3 Pullback to its 20 DMA off new record highs yesterday. Today, AMZN knifed convincingly below the setup trigger as the failure also stabbed down through the prior July swing high eliciting a quick plunge to the 50 DMA.
Now, where have we seen an overthrow of a primary July high in October fail? Can you say the major indices in '07?
Below, see a daily AMZN chart from June with 50 its DMA.
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Small Caps Get Smaller
Small-cap stocks, represented by the Russell 2000 ETF (NYSEARCA:IWM) have been the star performer within US markets this year, but look increasingly vulnerable not just from a trading perspective, but an investment one. Growth estimates are being cut across the board for next year, and it appears unlikely that the Fed can suddenly increase QE for at least several months to counter a scenario where the bottom falls out on the wealth effect that comes from rising equities.
On a rolling 52-week return basis, they are largely extended, and everyone is seemingly still trying to chase past performance. In addition, since June, the Emerging Markets ETF (NYSEARCA:EMM) has been outperforming, and has cheaper valuations. Given the same momentum, is it not the logical choice to position into those areas with more valuation cushion IF you have to be an equity investor? As to macro managers such as ourselves, the odds are growing for a rotation to bonds. A correction may finally be here.
Wednesday, October 9, 2013
You're Yellen! My Mustard? No, Your Fed Chief!
Equity futures are higher this morning on news that Janet Yellen has been picked to replace Ben Bernanke at the helm of the Fed. Yellen, the vice-chair since 2010, is perceived to have white feathers sewn in the seam of her pantsuit, symbolic of her dovish policy inclinations.
S&P futures popped six handles last night on the news and remain higher as I write this Buzz. I will remind Minyans that following an out-sized move, the market tends to probe the prevailing direction--in this case lower--at least once the following session.
S&P 1600 is the next stair-step support while 1660 and 1680 are tranched resistance.
Treasuries Are Talking to You
On October 3, the yield on the ten-year dropped to 2.58%. Then politicians started discussing the possibility of missing a few days on the debt ceiling. We even had quite a few folks stating it would not be a big deal. But yields started climbing and have not looked back since, even as SPX dropped 60 handles. We are now trading in and around 2.65%. Either the bond/treasury market believes there will be a big rally in equities, or we are seeing hints that real sellers are lurking. The crash of 1987 was preceded by a spike in interest rates. Can it happen again? It is a remote possibility, but at the very least be prepared, and buying treasuries does not seem to be the way to go. It will be a big deal to miss a few days on the ceiling. It's about credibility, and bonds are clearly showing that. They should be rallying in a big way with this equity meltdown. That is not the case.
ZN (10yr futures) is still trading under its weekly pivot of 126'105, the level we are toying with. Note the October lows of 126, support that needs to hold. We have a critical auction on the ten year today, so maybe all this is just prepping a short squeeze. Resistance above 126'105 is 126'160/126'180, the Yellen pop last night (which did not last for more than a few minutes).
As for equities, ES (SPX futures) is now trading under 1650.25, its weekly pivot. For cash, breaking out of the wedge on the weekly SPX chart and losing the 20 week moving average (1661) is troubling to say the least.
We Don't Know Jack
Where will you be at 5:30 a.m. tomorrow? I'll be at my desk here in Seattle, listening intently to Treasury Secretary Jack Lew's testimony in front of the Senate Banking Committee at 8:30 a.m. EDT (hence 5:30 a.m. Seattle time). If you were watching CNBC this morning, you caught Mark Patterson, a staffer for former Treasury Secretary Timothy Geithner, talking about the limitations of what Treasury can do with shifting funds around and timing payments with inflows. The goal of the testimony tomorrow is to nail down exactly how far Congress can push the US beyond the October 17 "deadline" without actually defaulting on any "important" payments.
This is Russian Roulette, obviously. As Mr. Patterson was trying to point out (in between Joe Kernan trying to channel Rick Santelli), the idea the Treasury can shift things around has one really big caveat: It assumes those who hold T-Bills are going to roll the face value. If any substantial number of note holders ask for the entire value at maturity, it's a completely different deal. I think it's clear we can go some number of days beyond October 17, and that's the message Wall Street will take from Secretary Lew's testimony. Is this bullish for equities? Bearish? We're in fear mode right now, so I think it's hard to tell.
We had essentially no movement in Washington, DC over the last 24 hours. Just like yesterday, however, there are some positives. The Senate Democrats are apparently working on a "clean" CR and debt ceiling extension. I've heard two months, but I would expect the extension to go into January, so lawmakers don't have to deal with this over the holidays. The buzz about a separate bipartisan Senate effort to wrap a clean CR and debt ceiling extension with a specific framework for negotiations continues to build and staffers are apparently working pretty diligently on this. I'm also hearing about a $1 trillion debt ceiling raise bill in the Senate, which would essentially get us beyond the 2014 midterms -- though I don't think there would even be enough Democrats to support this since the optics of that would be terrible.
If the rest of the week in the markets goes like yesterday and today thus far (to 11:45 am EDT when I'm writing this), I think Congress will start getting serious about doing a deal. And I chose the word "start" purposefully because I don't think more than a half-dozen people on the Hill have been serious about doing a deal to this point. I also strongly believe Congress has convinced itself the October 17 deadline isn't really a deadline. Because of this, I think there is a 50% chance we go beyond October 17 without a deal (up from 10% yesterday). Why the big jump? Nobody in Congress sees the 17 as a deadline, so they can go beyond it with no real consequence (their thinking, not mine.) Also, there's this last item we need to remember:
This crisis has been great for Congress and both political parties in one monumentally self-indulgent way -- money has been rolling into campaign coffers. All this controversy is great for fundraising from partisans on both sides. I'll skip the long lecture on how this is a perfect example of why we need Constitutional-level campaign finance reform, but anyone trying to apply reason to the unreasonable in Congress needs to understand this counterintuitive metric. The closer they take it to default, the more money they'll be able to raise.
Thursday, October 10, 2013
Long-term Fracking Play
As America continues on the path of energy independence, I have been looking for some good long-term fracking plays. My favorite in the space is Flotek Industries (NYSE:FTK).
This is on the chemicals side rather than on the exploration & production side of things. From a fundamental perspective, it has just about everything you want: P/E around 20 with a growth rate of close to 40, giving a low PEG of around 0.5. Plus, it has a Return on Equity of 29! Net margins are around 15 where 10 is more typical, so the company is running an efficient company, and it has multiple product streams for further penetration with existing customers. Product lines include drilling products, drilling chemicals, efficiency chemicals, treatment chemicals, fracking chemicals, and foaming/gap expansion chemicals, so it's not just fracking chemicals but a focus on overall increases in well production. I see the fracking chemicals becoming a lead-in type of product to get the company's foot in the door and allow for additional product sales once FTK has established a relationship with the customer.
The balance sheet = High liquidity, with a current ratio around 1.5.
The cash flow statement is a little concerning on the FCF side, but it is distorted by the recent acquisition as well as by refinancing measures to reduce interest rates on long-term debts. Balance sheet management has been top notch, in my opinion.
Technicals look good-to-in-a-strong uptrend, which is exactly what you look for in a small growth company. I could easily see this thing doubling in a year and double again in five years. It is pretty much a "catch-it-on-the-50-day-dip" type of stock. I plan on buying 1/2 here as it recaptures its 21-day moving average where the market dipped below its 50-day and is trying to recapture that now. I am taking a ½ position here and would round it out against the 50-day moving average should it happen. If not, I will just have to buy it higher.
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T-Report: Lew-Lew Lemon and Our Top Trade Ideas
I think he is more political than a Treasury Secretary should be, even knowing that it is a political position. Having said that, I think he hammered home the point that America should not default. There is no easy way to deal with a default and it is unclear what will happen if we default. He remained "on message" that the debt ceiling should be raised and a default should be avoided.
I don't think a default would be as dire or apocalyptic as Lew makes it out to be, but agree that tempting fate with a default just doesn't make sense.
So Sell US CDS
Hearing 1 year CDS is still 60 bid and 5 year is 34 bid. Seems like either should be sold. The US will not default.
We had that call last Friday and in spite of the noise it hasn't really moved much either direction since then.
We did confirm that a 3-day grace period would apply to any missed payment in regards to triggering a Credit Event. We don't think we will have a missed payment, but figured we would pass along the clarification we got from ISDA.
Go Really Long Bank Credit Risk
We discussed why we like buying bank bonds and selling bank CDS earlier this week. That is a longer term trade, but one that we really like.
IG21 – Not our favorite index
IG20 rolled into IG21 with only a few name changes. One of the changes was adding Assured Guaranty Municipal Corp (NYSE:AGO) to the index.
On a quick glance it looks like it is trading at 550 bps. No other name is trading at 300 bps. It is almost double the next widest name. There are only 6 other names trading wider than 200 bps. The company has no public debt at this entity. Bond investors don't know this company particularly well (or at all). The equity market capitalization of the holding company is also small.
So I am not sure who thought this was a great addition to the index, but they basically added a small, not well known, outlier to the index.
We continue to do some work with the S&P/ISDA 150 Credit Spread index which is based off of names in the S&P 500 equity index and includes financials. We think that as products develop around that (trueEX/CME futures for example) that the index will have a more broad based appeal.
Decisions to add a name like Assured Guaranty only seem to make the CDX index less relevant to a broad audience, rather than more relevant.
At 80 bps, trading a few bps rich, I would rather find single names I like. Too much of the spread is driven by a few names that deserve to have that high spread. Too many names pay you nothing with a chance to LBO or do something else to push them wider.
Hearing that Citi put together a long report lamenting what Basel will do to the repo market. Our sense is that the Basel Leverage rules will not be changed easily or that significantly. That has implications for many businesses. You can read our open letter to Basel as part of the official comment period.
We have done a longer white paper to help clients prepare for the changes and look for opportunities. Please contact us if you want to see that more in depth piece that looks at the impact across products.
A Slowing Economy
Equities remain strong. The combination of knowing that Janet Yellen will be there to buy bonds every step of the way, coupled with the realization that the government will avoid hitting the debt ceiling is working its magic.
It might be a bit early to start selling this rally, but it feels that this "dip" has been bought often and early (like Chicago voters) and has ignored too many signs that an economy that was already not growing as fast has continued to falter.
While stocks might be able to forget there were any questions about Washington, businesses are likely to take longer to decide to be more aggressive on growth.
For those keeping score, Spain and Italy are up over 4% in the past week while U.S. markets are still slightly down.
BlackBerry Co-Founders Up Stake in Company
BlackBerry (NASDAQ:BBRY) shares are popping a bit after co-founders Michael Lazaridis and Douglas Regin have increase their stake in the company to 8%.
According to their SEC filing, they are considering "all available options with respect to their holdings of the Shares, including, without limitation, a potential acquisition of all the outstanding Shares of the Issuer that they do not currently own, either by themselves or with other interested investors."
I am currently long the December $9 call butterfly spread on BlackBerry that is essentially a bet that the Fairfax bid for $9/share goes through this year. Because of the structure of butterfly spreads, I'd actually lose out if that bid got upped in a meaningful way.
As it stands now, with BlackBerry up just 0.7% today (vs. NASDAQ (INDEXNASDAQ:.IXIC) up 1.9%), Mr. Market is still rolling his eyes at the idea of BlackBerry getting taken over by Fairfax OR Lazaridis/Regin, but I'm sticking with my butterfly play as the risk-reward is very reasonable.
Friday, October 11, 2013
T-Bills: Here We Go Again
I wrote yesterday a few times about how October expiry T-bill rates were coming down - a good thing from a liquidity standpoint. This morning the entire T-bill curve is getting infected by the short-term debt ceiling agreement, which just pushes it out into the future. We're seeing late November and all December T-bill rates skyrocketing. The fulcrum point seems to be the Nov 29/Dec 05 bills. Dec 05 was 4bps yesterday morning and now up to 22.5bps.
I imagine the market is just taking the same precautions as they were for the near-term debt ceiling. The major, major problem is that now it has infected a full 3 months of T-bills, that's a major problem from a collateral standpoint. See my screen grab of bill rates below. Keep in mind the price move in bills that far out is much larger in magnitude than the nearer to maturity bills.
I see gold and oil getting crushed this morning, it is very possible these two events are connected.
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My thesis that we would receive a counter trend rally proved profitable, while the notion of attempting to fade yesterday's market muscle was a rather weak attempt. Patience allowed us to attempt a low risk short entry on the market with tight stops. That proved to be a short-lived experiment. After the close last night, President Obama rejected the band-aid approach offered by the House Republicans. As has been the case, this will drag on for the balance of the weekend and into next week.
The volume and out performance of the banks yesterday were the two most impressive measures. JPMorgan (NYSE:JPM) came out this a.m. with some rather large numbers to back it up. What we need to gauge now is how do we hold up? The trading thesis dictates that if the low was set on Wednesday then that was an exhaustion of internals. Now, we may see prices move back down to put in a higher low and confirm the bottom. That likely will be experienced next week, so we have the whole weekend to marinate ice cubes and wait with wonder.
What has me leaning out of my chair to stair at the road not yet laid is the news this am Bill Fleckentsein is re establishing his short fund. This is a man I would never want to be on the other side of a trade with. The beauty is he possess the patience to wait. Recall he closed his last fund at the depths of the markets low in 2008/2009 and has sat back for 5 years. If you want to get me bearish, then I think we need to portfolio managers jam the tape into year end, open 2014 strong, and have this market sitting frothy with a spring taper. This would send shock waves through the system. If the market is to trade above 1695 in the coming days/weeks, look for my final objective to hit SPX 1760-1820. The speed of our pace to that approach will dictate how fast Mr. Fleckenstein opens his wallet.
One Step or Two Steps?
Twenty-four hours after movement towards a stand-down in DC, a better picture of what's driving this has emerged. As I suggested last week, it was polling data.
Could you do your job without a real-time quote feed? Almost certainly not. Without it, you'd be blind to what the market was doing. You'd have no idea whether you were performing well or getting clobbered.
Wall Street is to Real Time Quotes as Politics is to Polling.
I wrote yesterday about the Gallup poll showing the GOP with historically bad "favorable" ratings, down to 28% and sinking fast even within the ranks of self-identified Republicans. While this scared the hell out of party regulars (nobody wins an election with a 28% favorable rating), what prevented the Tea Party from claiming (as they have consistently been doing) that falling poll numbers were caused by "not being conservative enough" was the WSJ/CNBC polling data on the Affordable Care Act ("Obamacare").
After all the grandstanding by the Tea Party about defunding the ACA over the past two weeks, "Obamacare" is polling at some of its highest "favorable" numbers ever. So not only has the Tea Party succeeded in clobbering the GOP's ratings, they've made Obamacare more popular in the process. This, combined with the movements in the equity markets, have the Republican leadership highly motivated to quit listening to their minority coalition partners and close a deal.
We got a scare overnight when the NYT reported that President Obama rejected the GOP's offered deal. Futures dropped until the NYT retracted the report, but I actually think it was accurate. I believe President Obama rejected a deal that only extends the debt limit for 6 weeks. I expect what we'll get is a deal to extend the debt ceiling and reopen the government. I expect this will be wrapped up in a broader framework of some sort to bring House and Senate members into conference on the budget that was passed so many months ago.
How long will the extension be? We know staffers for Senate Democrats are pushing for an end-2014 deadline. If there is a strong structure created for the budget negotiations, I'd expect the deadline to be pushed out until January to avoid revisiting this issue over the holidays. My guess is we get a 3-month deal, no changes to the ACA, and some sort of specified group to work on both cuts and closure of tax loopholes.
Remember that Monday is a federal holiday, so the bond markets are closed. Equity markets are open. I believe we have a deal before the equity markets are open Monday, but keep the idea that the holiday could stretch things into Tuesday in the back of your head.
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